WHY ARE MORTGAGE RATES JUMPING?

"Even as the Fed has lowered interest rates, and as the general pattern of interest rates has declined, the pressures in the credit markets have caused greater and greater spread, particularly for risky borrowers, just like risky firms, for example,"  he said.  "Our easing is intended to, in some sense, you know, respond to this tightening of credit conditions.  And I believe we've , you know, succeeded in doing that, but there certainly is some offset that comes from widening spreads.  This is what's happening in the mortgage market."

What that means to us is that the Fed doesn't control the price of long-term loans any more than consumers do.  What has happened is that even as the Fed has been making cuts to short-term rates, the global capital markets are still very nervous about the latest headlines on rising foreclosures, a weakening economy, and losses from banks and other lenders that have topped $100 billion - so far.

Mortgage lenders turn to capital markets - a global network of banks, corporations, institutions, pension funds, governments and individual investors who buy and sell money.  When they lend money for the long term, they agree to get paid back in installments, plus an interest rate that's usually fixed for the life of the loan.  As long as the rate the mortgage lender agrees to pay the investor is lower that the rate it charges its customer, the lender makes money.

When the investors with money to lend in the capital markets get nervous, they demand an even higher interest rate to make up for the risk that they won't get paid back.  During the housing boom the risk factor was low because of rising housing prices.  Now that home prices are falling, in some markets, the risk is greater to investor.  So we are seeing that the investor is charging a higher rate and that increase is being passed down to the customer in the form of higher home mortgage rates.